August 02, 2006

More evidence that what we are all seeing in the trenches of Silicon Valley is also being reflected in the industry data. I've been telling everyone I know that the venture industry (which includes the VC's firms as well as the entreprenuer's and their companies) is as healthy as it's been in recent memory. It continues to feel very much like 1997-1998 (prior to the bubble). Yes, there are also signs of "bubblish mentality" through some recent fundings (VC bets), but only 1-off stories for now and it feels like the hard lessons of the past have indeed been learned in better fundings and better management.

Venture capital firms continued to show strong gains through the first three months of 2006, showing that the Silicon Valley formula of placing bets on young companies is still paying off.

According to data released this week from Thomson Financial and the National Venture Capital Association, venture funds pulled in annual returns just shy of 20 percent, approaching the high end of the 10-year average. That was up from 13.3 percent in the fourth quarter of 2005, and 4.6 percent a year ago.

How long the healthy returns last may depend on the future health of the market for initial public offerings of stock, which has been flagging lately. If the growing fleet of venture-backed start-ups can't successfully go public and offer shares for sale in the market, venture returns will slow.

NOTABLE FUNDINGS AND FACTS FROM Q2 2006
$100M rounds of investment are increasing. This is a significant indication that large dollars from smart VC's are betting that these companies will be worth at least $1B which could foretell the return of a healthy IPO market in the next 18 months (end of 2007/2008)

Altra, a Los Angeles biofuel company, has raised $120 million in a second round of funding. It is one of the largest rounds of funding ever raised by a renewable-fuel company. Limelight (an Akamai competior) that is the technology backend supporting YouTube and other internet video streaming also raised +$100M in Q2 2006.

I've also heard several indications of $50M Series A fundings that will develop starting in Sept 2006 from several promising startups going after big markets requiring large investments.

Doll Capital Management, a Menlo Park venture capital firm that has recently invested aggressively in China, has raised a new fund of $500 million to invest in fresh companies. It has offices both here and in Beijing, and also invests in Japan.

TVC raised one of the the largest ever funds in Q2 2006 at 1.5 Billion. Total Funds raised by VC Firms in Q2 2006 was almost $6.5 Billion.

Venture capital investment in Startup and Early Stage companies remained flat from the prior quarter in terms of dollars but increased 13% in the number of deals to $1 billion going into 268 deals, suggesting that VCs are offering smaller rounds to more companies. Average post-money valuations of Early Stage companies dipped slightly to $14.06 million for the 12 months ending Q1 2006.

Funding for Expansion stage companies hit the highest investment level in four years, reaching $2.9 billion, a 17% increase over the prior quarter. The number of deals rose slightly to 329, a 6% increase from Q1. The average post-money valuation for Expansion Stage companies increased to $59.16 million

The number of companies receiving "First Time Financing" reached a five-year high in Q2 2006 with 282 companies receiving $1.3 billion. This increase coincides with the recent fundraising cycle and reflects the opportunity to deploy funds into first-time companies early in a fund's life.
Source = NVCA (National Venture Capital Association) Data.http://www.pwcmoneytree.com http://www.nvca.org

BOTTOM LINE:
The Silicon Valley startup market is on a healthy pace of company creation, job/employment creation and once again provding the underpinnings for the next successful round of public companies.

October 27, 2005

...And How Today's Entreprenuers and Startups Are Quite Similar To Today's Top Chefs and Restaurants.....

The kitchen is getting crowded. There are several cook's in the kitchen and everyone is using the same ingredients. These analogies have been recurring themes in my head the past several months. Start-ups are back in a very visible way in Silicon Valley, the VC market is very active, and the M&A market is exploding.

So what's different this time? The article below offers a good premise that we are entering a "golden age" of company creation. After reading it, the analogy I used above (startups vs top chefs and restaurants) dawned on me. By combining today's specialized technology ingredients (XML, RSS, etc) with several basic technology ingredients (Linux, etc), today's very smart entreprenuers can be likened to some of the top chefs in the world where star status is not differentiated by the ingredients used (there are no secret cooking ingredients) but rather by HOW the ingredients are combined and MOST IMPORTANTLY how the whole package is presented (not just the plate of food but all the way down to the restaurants ambience and wait staff service level).

Below are a few articles with different but similar viewpoints on this new "golden age" of technology

It is likely that in the coming years we will see sizable businesses (based on yearly revenue) come and go at what will seem to be alarming speeds. Businesses can now be created in a matter of weeks to capitalize on whatever important trend or market demand is surfacing. Huge amounts of venture capital in many cases will not be required for establishing the infrastructure, the billing and accounting systems, the transport or supply systems, the IT function - and the list goes on. Such commodities will be expertly and automatically leveraged by super-deep, business-to-business automation, and new enterprises will start up by focusing their energy on differentiating their value in the marketplace rather than creating and supporting all of the associated accoutrements.

August 22, 2005

The VC market is getting healthy again. VentureWire reported today that $6 Billion of new funds were raised by VC's in Q2 2005 (that's outside investors (Limited Partners) giving money to VC firms so they can invest in startups at some later time). For perspective, $2.5B of this was raised by only 3 firms (Menlo, August Capital, and NorthBridge). This $6B quarterly number puts CY 2005 on pace for VC's raising nearly $25 Billion of capital that they can invest in their respective startup portfolio's.

I don't believe the media does a good job of giving perspective to VC data. So let's give it a shot by comparing how much was raised vs how much the VC's have invested historically in their startup portfolio's.

Reviewing PWC's Money Tree Data we find the following VC funding history (VC's investing in startups) for the last 10 years. In 1995, there was $7 Billion invested. 1996 = $11B; 1997 = $15B; 1998 = $21B; 1999 = $54B (beg of the bubble); 2000 = $105B (bubble); 2001 = $41B (post-bubble); 2002 = $21B; 2003 = $19B; 2004 = $21B; 2005 ~ $25B (estimate). I couldn't get the graph to work out for the X/Y Scale but all you need to know in the picture below is the gridlines are every $20B (Y scale) while each dot represents a year (1995-2005).

30% of all U.S. VC Backed Companies are funded in Silicon Valley. This grows to 45% if you include all of the West Coast (Southern Cal, Seattle Area, etc)

Other than the bubble period, 200-250 companies get funded every quarter in Silicon Valley. We are on pace for 900-1000 companies funded in CY 2005. My gut says this is a function of # of VC's and # of partners and time/focus.

The average investment (dollars / # of companies) per VC funding is a rather tight range of $8.5M-$9.0M per company funded. Again, an average. This compares to pre-bubble funding amounts of $5-$6 million vs the peak bubble days of $16-$17 million per funding. I'm looking for this number to increase over the coming quarters as exits today are more visible and getting bigger faster is once again in vogue.

The data suggests that we are on track for the "old normal" of 1998 (borrowing from and apologies to Roger McNamee's new normal analogy). I remember commenting to a few colleagues last fall (Oct 2004) that it felt to me like the VC industry had really started investing again for the first time in 3 years. Today, it feels like the pace continues to pick up and if the data keeps rolling in like this, the VC market will continue their powerful economic engine of Silicon Valley. VC's fund companies, companies hire people, people buy things from companies, companies buy other companies, companies go public..and so on.

My gut tells me we are going to have a very fun next few years again....stay tuned...Finally, VentureWire's story as a reference:

venture market summary

By VentureWire Staff Reporters

U.S. venture capital firms raised $6.07 billion in new
funds in the second quarter, the largest amount raised
in a single quarter since late 2001, according to
industry tracker VentureOne. The amount starkly
contrasts the $2.3 billion brought in during the second
quarter of 2004, and it represents an 80.5% increase
from the $3.36 billion raised in the first quarter of
2005.

........The latest second quarter figures are
heightened by several large venture firms that closed
large-sized funds during the second quarter. Menlo
Ventures, closed its tenth fund with $1.2 billion in
April, and both August Capital and North Bridge Venture
Partners' new funds topped $500 million.

August 11, 2005

Fred Wilson (a VC) nailed it below. His advice on how you absolutely need to find people (preferably your team) to be completely honest with and rely on is how great teams and companies are made. The resulting loyalty created and the amazing abilities of all team members to go above and beyond is the secret sauce of a great culture.

A CEO/founder must surround themselves with people who they like, trust, and can lower their guard with. The best leaders have a "kitchen cabinet" of people they can be completely honest with and who they rely on for advice, counsel, and support. It is tricky to provide that back to the same people who are providing it to you, but you must try to make it happen.